Selling the family silver?

We reached the 200th anniversary of the birth of Charles Darwin, controversial naturalist, in 2009. Darwin is obviously best known for his evolutionary selection theory of survival or extinction of each organism being determined by its ability to adapt to its environment. What is less known was his fascination with the first economist pioneers and with "laws" that govern the accumulation of wealth and "laws" which lead to being poor. 

 

Against this background it is worth reminding ourselves of some of the facts that face family-owned businesses, both present and future. About three quarters of the UK's 4.3 million businesses are family-owned, which is commonly considered to be one where between 25 to 50 per cent of shares are held by members of the same family, or where the firm has passed between generations. The vast majority of family-owned businesses have sales of less than £50 million, but 10 per cent of these businesses have sales of over £100 million and there are some good examples of those in the Midlands including JCB, KTC Edibles, Listers Group and Wates Group. The latter has been in the Wates family since its inception in 1897. There is undisputed evidence, however, that the survival rate of family-owned businesses diminishes with each passing generation. Only 24 per cent survive second generation whilst a mere 14 per cent survive third generation.

 

According to a prominent accounting firm, over the next five years approximately one third of owner-managed businesses anticipate a change in ownership. This equates to 30,000 small and medium enterprises employing over 300,000 people, and research by Bibby Financial Services concluded that around 50 per cent of entrepreneurs in the UK do not have any succession plans in place. From an economic point of view for businesses that change ownership – whether this by management buyout, family succession, trade sale or flotation – attrition rates are greater than perceived higher-risk business startups, and they employ many more people. So against this background it is imperative that awareness is raised amongst the family-owned business community of the importance of planning for succession or exit, and the earlier it is considered the better. Those working in a family business enjoy a sense of belonging and have a feeling of achievement as a family unit, but emotions can run high in family businesses and personal conflicts can sometimes spill over into the boardroom. The greatest source of upset in family businesses is the unwillingness or inability to remove underperforming family members. A lack of communication, pay levels and sibling rivalry are also major causes of irritation.

 

There is no guarantee that a family will produce good leaders every generation, so key roles within the management team must be assigned according to skills, experience and qualifications, whether this is sourced internally in the business or externally in the open market. Addressing management succession is key regardless of which exit route is preferable for current shareholders. A strong management team provides flexibility, longevity, enhanced governance and a self-challenging working environment.

 

Of course, a key consideration is cost and timing of appointments or promotions but a lack of key management skills more often than not inhibits progress and evolution in line with market developments and technologies.

 

Ideally the business needs to be prepared at all times for succession so that shareholders can address an unforeseen knock on the door if you are lucky enough to attract a suitor, or there is a need to deal with unpredicted circumstances such as illness or disability.

 

Market conditions are continually changing and the last 18 months have certainly not been the most productive, but it is all too easy to jump on the bandwagon and blame the current difficult trading environment for inaction surrounding the longer-term security of businesses. For the right business, which has given more than lip service to succession planning, there is always an opportunity to find the right investor, acquirer or management sufficiently skilled to take the business to its next stage.

 

So, compared to his more famous quirks, Darwin's lesser known fascination regarding the laws of accumulating wealth or reaching financial Armageddon is worthy of note, and it is surprising that a common sense approach to succession planning is hardly ever in the forefront of a significant proportion of entrepreneurs' minds probably because the fittest, obviously, always survive…

 

Adrian Jones is a partner at Gambit Corporate Finance LLP. Gambit has developed its own succession plan model, STEP, which aids in evaluating the various routes open to shareholders wishing to plan for succession or exit.

 

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